20 Jul May We Live In Interesting Times – Chinese Proverbs
Whilst events in Greece continue to dominate the media, it is China that should be giving more cause for concern.
During the past year, Chinese equities rose by 100%, attracting thousands of new investors along the way. Margin finance enabled investors to borrow money to fund their equity investments.
In June, the Chinese stock market fell by 32%. Given the preceding rise, the fall was not such a shock, however, the Chinese governments response certainly was. The authorities seemed to panic just as much as investors and introduced a raft of emergency measures.The government ordered a ban on share selling and then ordered brokerages to buy shares to keep prices from falling. It has now emerged that state owned banks have injected $200 billion into the system to support equity prices.
China will remain hugely important to global growth, however, as they try to liberalise the financial system within a communist framework, risk and volatility is likely to increase.
Since the 2008 financial crisis, we have become accustomed to governments intervening to support the financial system but we have not witnessed direct interference in free markets.
It is now impossible to value many Chinese assets and the actions of the government may deter foreign investors.The stock market fiasco follows the government fuelled property boom and significantly increases China’s risk profile.
Several leading fund managers began decreasing their exposure to China before the crash and although short term performance suffered, they have been vindicated by recent events.
China will remain hugely important to global growth, however, as they try to liberalise the financial system within a communist framework, risk and volatility is likely to increase. The rate of economic growth is also likely to slow.
Performance has been strong across global equity markets, but now may be a good time to refocus and consider risk ahead of short term performance.